Identiv Inc (INVE) 2024 Q2 法說會逐字稿

Good afternoon.

Welcome to Identiv presentation of its second quarter 2024 earnings call.

My name is Holly, and I will be your operator this afternoon.

Joining us for today's presentation are the company's CEO, Steven Humphreys; CFO, Justin Scarborough; and President IoT solutions, Kristen Newquist.

Following management's remarks, we will open up the call for questions.

Before we begin, please note that during this call, management may be making references to non-GAAP financial measures or guidance, including non-GAAP adjusted EBITDA, non-GAAP gross margin and non-GAAP operating expenses.

In addition, during the call, management will be making forward-looking statements.

Any statement that refers to expectations, projections or other characteristics of future events, including the pending asset sale, transaction, future business and market conditions and opportunities and future plans and prospects, including with respect to the transaction and Identiv post-closing business is a forward-looking statements.

Actual results may differ materially from those expressed in these forward-looking statements.

For more information please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest annual report on Form 10-K and quarterly report on Form 10-Q as well as our second quarter 10-Q once filed.

Identiv assumes no obligation to update these forward-looking statements.

I will now turn the call over to CEO, Steven Humphreys, for his comments.

Sir, please proceed.

Thanks, operator, and thank you all for joining us.

The second quarter accomplished the three main goals for the business to build our base for the company's long-term future.

First, kudos to Newquist, the President of our IoT business and soon to be CEO of Identiv, made great progress understanding our core IoT business and developing a rigorous plan for future growth.

Second, we cleared all, but the last one of the process hurdles to close our transactions to divest our security business lines.

And third, our combined total company revenues exceeded consensus estimates, delivering the results needed to keep our strategy on track.

I'll address the Q2 results in the context of the transaction and support for the business going forward.

And then turn the call over to Kirsten.

Execution across Identiv continued as projected, despite being in a pre-closing state that can be distracting for any organization.

We were able to deliver revenues above consensus estimates through Pearson's leadership of the IoT team and solid performance of the physical security and identity reader teams.

As we progress through the preparations for the closing of the strategic transaction later protect has been a supportive partner, enabling management to focus on executing our growth plan to deliver this revenue.

Just as important, we're managing cash tightly to be sure our businesses are healthy during the transition.

As a result, we finished in a better cash position than our internal forecasts.

Operationally, we had some gross margin pressure due to mix in the security business and temporarily lower overhead absorption as we accelerate our move to Thailand, partly offset by the phase-out of some lower-margin business.

Regarding the transaction process, we've executed each step on track.

We've cleared antitrust and UK regulatory approval.

And for our shareholder approval, we received a 96% positive vote among our voting shareholders in favor of the strategic transactions.

Our only remaining regulatory step is US government CFIUS approval.

This is going well and we expect a decision within the Q3 timeframe we've communicated before.

We're confident we're on track to close the transaction as planned.

Upon closure, we expect to add about $130 million in net cash after taxes, bankers' fees and one-time costs.

One other clarification I'd like to make about our reported financials.

In today's earnings release, in accordance with GAAP, our financials are now being reported as continuing operations, our IoT business and discontinued operations.

Our physical security and reader businesses.

Now Justin will cover these in further detail in the financial discussion, but before that, I'd like to turn the call over to Kirsten for her update on the current IoT business.

Kirsten, over to you.

Thank you, Steve, and good afternoon, everyone.

I'm glad to be with you all today to provide an update on the IoT business and the progress we've made on our strategic growth and go-to-market plans.

Since we last spoke in May, I've been at Identiv for nearly four months and have spent much of that time diving deep into the details of our IoT business and preparing for the anticipated close of the asset sale transaction, which will provide significant capital to fund the future growth of the company.

I have visited our offices in Germany, Thailand and Singapore to meet with our teams, learn about our sales and R&D processes and listen to their feedback.

We have some of the most talented people in the RFID industry working at Identiv and their passion for our technology and customers is energizing.

I've also had the opportunity to meet with some of our customers and suppliers, allowing me to hear directly from them about the areas where we excel and where we can improve.

I've received particularly positive feedback on our ability to quickly develop technical solutions and produce prototypes for testing.

As I've gotten to know the business, some of my initial impressions were confirmed while others have evolved as I've learned more.

I'll start today's discussion with an update on our core IoT business.

With a deeper understanding of our customers' products and capabilities, it is clear to me that the opportunity space for Identiv specialty IoT solutions is strong.

Going forward, we need to focus our organization on the highest potential and most sustainable opportunities.

Our core business is primarily focused on selling and marketing through the RFID channel, which allows us to serve many industries and segments and complements our own sales and marketing efforts.

With those of our partners.

We are strengthening our relationships with our channel customers shifting from a traditional supplier approach to a more collaborative partnership model.

We have many promising customer-driven new product development opportunities and progress such as an HF authentication solution for surgical consumables.

NFC enabled smart labels for auto-injectors and NFC enabled smart labels for top-shelf liquor brands to enhance consumer engagement.

However, we need a more disciplined approach to evaluating these opportunities from the start and throughout the product development process to ensure we focus on those that we expect will have a sustainable competitive advantage and strong ROI for the business.

To address this, we are implementing a stage-gate process to actively manage the projects, assess viability and ROI at each stage and maintain continuous customer engagement.

We are developing clear criteria for accepting new opportunities as well for entering each stage of the development process.

New projects must meet these acceptance criteria before we begin design work, and we will be diligent in reassessing at each stage gate.

When I visited Thailand, I was very impressed with our new state of the art production facility with its competitive cost structure and led by our highly experienced RFID operations leader and his skilled team.

As we mentioned on our last earnings call, the transition of our RFID production from Singapore to Thailand is a key near-term priority and we are progressing it with a high sense of urgency.

We made significant progress in quarter two toward that objective, including receiving our ISO 9001 and ISO 14001 quality certifications for the Thailand facility, and we will continue to move machines and add headcount in Thailand throughout the second half of this year.

We are on track to complete the majority of the transition with the exception of three customers by quarter one 2025.

Due to qualification and regulatory requirements we will continue to support these three customers in Singapore into 2025.

We are continuing to phase out our very low margin business and anticipate discontinuing another 10% of this year's volume in line with completing the transition.

Once we shipped our production to Thailand and the team achieves full productivity, we expect the non-GAAP gross margin of our core business to almost double reaching 26% to 28%.

By focusing our growth efforts on higher margin segments, those with over 35% gross margin, we believe we can ultimately achieve a 30% plus non-GAAP gross margin for the business.

Nonetheless, there remains much to do for the IoT business to fully capitalize on its potential and achieve the scale necessary to become a self-sustaining stand-alone company.

Separating the IoT business from the physical security business will require focus resources and collaboration with the physical security team during the 12 months transition period.

We have engaged an external adviser to assess our current business processes and identify key priority areas.

We are building the plan to address these areas to ensure we have a strong foundation on which to scale the business, although we see a path to achieving a 30% non-GAAP gross margin.

We will need to scale the current size of our IoT business with our OpEx profile, including the costs associated with being publicly listed, we believe we should be able to achieve EBITDA breakeven at $60 million to $70 million in annual sales.

This leads to my second key priority, which is to complete our strategy and growth plan.

So we have a clear path to reach this annual run rate as quickly as possible.

While we expect that much of the strategy will be organic.

We are also exploring other strategic options such as mergers, partnerships and acquisitions.

As we consider these options, we intend to focus on those that not only bring scale, but also offer complementary products, strong synergies, talent and are highly accretive financially.

But before I get into the details of our strategy efforts, I would like to hand over the call to Justin, so he can provide the financial update on quarter two, the cash requirements for the next 12 months and the Q3 guidance for our continuing operations as well as the combined business.

Thanks, Kirsten.

Although we concluded the second quarter of 2024 as a combined company, as Steve mentioned, in accordance with GAAP, we are required to report financials for the continuing operations of the company, our IoT business and report the financials for the physical security business as discontinued operations due to the pending sale of the assets of that business.

Since we provided Q2 guidance for the combined company, including both our IoT and physical security businesses.

For comparison purposes, we have also provided the aggregated total company results, which are now considered non-GAAP in today's earnings release.

Our GAAP revenue from our IoT business for the second quarter of 2024 was $6.7 million compared to $11.5 million in the second quarter of 2023.

The decrease in GAAP revenue year over year was primarily the result of lower sales of our (inaudible) transponder products to one of our customers.

GAAP and non-GAAP gross margin in Q2 2024 was 9.1% and 14.6% respectively, compared to GAAP and non-GAAP gross margin of 14.2% and 16.6%, respectively in Q2 2023.

The decrease in gross profit margins was primarily attributable to lower sales, as discussed, which resulted in underutilization of our production facilities in Southeast Asia as well as the opening of our Thailand facility in July 2023.

As Kristen mentioned, by focusing our growth efforts on higher margin segments, we believe we can achieve a 30% plus non-GAAP gross margin for our IoT business.

GAAP operating expenses from our IoT business, including research and development, sales and marketing and general and administrative were $7.3 million in the second quarter of 2024 as compared to $5 million in the second quarter of 2023.

Included in the second quarter GAAP operating expenses were $1.6 million in strategic transaction related costs.

As of June 30, 2024, the cumulative strategic transaction related costs totaled $3 million. Non-GAAP

operating expenses from our IoT business adjusted to exclude restructuring, strategic transaction related and severance costs and certain non-cash charges consisting of stock-based compensation and depreciation and amortization were $4.7 million in the second quarter of 2024 as compared to $4.4 million in the second quarter of 2023.

GAAP net loss from our IoT business in Q2 2024 was $6.9 million or $0.31 per basic and diluted share compared to GAAP net loss of $3.5 million or $0.16 per basic and diluted share in the second quarter of 2023.

Second quarter 2024 non-GAAP adjusted EBITDA from our IoT business was a negative $3.7 million compared to a negative $2.6 million in the second quarter of 2023.

The decrease was primarily the result of our lower year-over-year IoT revenues, which also resulted in underutilization of our production facilities in Southeast Asia.

As well as the opening of our Thailand facility in July 2023.

In the appendix of today's presentation, we have provided a full reconciliation of GAAP to non-GAAP financial information, which is also included in our earnings release.

Moving now to our aggregated non-GAAP results for the second quarter of 2024.

For this transition quarter, we have provided an aggregated financial summary to provide a complete view of the entire business, and this aggregated non-GAAP summary includes our IoT and physical security businesses.

Aggregated non-GAAP revenue for the second quarter of 2024 would have been $24.3 million compared to $29.6 million in the second quarter of 2023.

The decrease in aggregated non-GAAP revenue year over year was primarily the result of lower sales of our BLE transponder products as previously noted.

Aggregated non-GAAP gross margin for the second quarter of 2024 would have been 35% compared to 36.7% in the second quarter of 2023.

Aggregated adjusted non-GAAP gross margin for the second quarter of 2024 would have been 37.3% compared to 38.2% in the second quarter of 2023.

The year-over-year decrease was due to mix in the physical security business and lower overhead absorption in our Southeast Asia operations.

Moving now to our operating expense management aggregated non-GAAP operating expenses for Q2 2024 would have been $14.5 million compared to $11.9 million in Q2 2023.

Second quarter aggregated non-GAAP operating expenses include $1.6 million in strategic transaction related costs, aggregated adjusted non-GAAP operating expenses, adjusted to exclude restructuring, strategic transaction related and severance costs and certain noncash charges consisting of stock-based compensation and depreciation and amortization would have been $11.1 million in the second quarter of 2024 compared to $10.6 million in the second quarter of 2023.

Aggregated non-GAAP net loss for the second quarter of 2024 would have been $6.2 million compared to net loss of $1.1 million in the second quarter of 2023.

Aggregated non-GAAP adjusted EBITDA in the second quarter of 2024 would have been a negative $2 million compared to a positive $0.7 million in the second quarter of 2023.

This change in aggregated non-GAAP adjusted EBITDA is primarily the result of lower revenues and margins as previously described.

In the appendix of today's presentation, we have provided a full reconciliation of non-GAAP to adjusted non-GAAP financial information, which is also included in our earnings release.

Turning to the balance sheet, which now reflects the assets and liabilities related to our IoT business.

Well, assets and liabilities related to our physical security business are being reported as separate line items labeled as current and noncurrent assets and liabilities held for sale.

We exited Q2 2024 with $19 million in cash, cash equivalents and restricted cash, a decrease of $5.4 million since December 31, 2023.

Now to discuss our expectations related to the asset sale transaction.

Assuming the asset sale transaction closes as anticipated, based on our most recent estimates for taxes, banker fees and other one-time costs and adjustments.

We currently expect net proceeds to be approximately $130 million.

It is worth noting that once the transaction closes we will be extinguishing our credit facility, which will be repaid with existing cash.

In addition, upon closing, our expected net cash use over the next 12 months, net of interest income is in the range of $14 million to $16 million.

In our 10-Q filing, we will be providing a full reconciliation of the year to date cash flows.

For completeness, we have included the full balance sheet in the Appendix of today's earnings release.

Lastly, our financial outlook for Q3 2024, we currently expect revenue from our IoT business to be in the range of $5.8 million to $6.1 million.

If the strategic transaction does not close as anticipated prior to the end of the third quarter, we expect aggregated revenue from our IoT and physical security businesses to be in the range of $24 million to $26 million.

This concludes the financial discussion.

I'll now pass the call back to you Kristen.

Thank you, Justin.

So with that financial context, I'd like to dive into the progress we are making with our strategic growth plan.

There are three pillars to our strategy: covering short, medium and longer term horizons.

The first pillar is to ensure that we have a clear focus for growing our core channel business.

Fundamentally, this near term strategy is about leveraging our broad set of existing customers, partners and product portfolio to grow in the channel.

We are strengthening these customer relationships, supporting our partners with joint marketing efforts and adding products our portfolio to grow our market share with our channel partners and customers.

We think there's ample opportunity to expand within our current set of customers and the applications we are currently supporting.

Our product focus continues to be HF/NFC Dual Frequency and BLE.

We are also evaluating specialty UHF applications and will be thoughtfully expanding our portfolio to include UHF where we can differentiate ourselves and build a competitive advantage.

These are not the high volume, low-cost applications for retail or logistics, where our competitors have built their leadership, but rather use cases for new applications requiring specialized designs.

We will also continue to strengthen our BLE capability as new applications for this technology are identified.

As I mentioned, we have several initiatives underway intended to ensure we successfully execute on our customer-driven product development pipeline, such as our new product development stage gate process.

As these programs will be important in driving the future growth and improved profitability of the core IoT business.

For our second pillar, focused on driving high-margin growth in the medium term, we are evaluating the high-value and high-growth segments outside of health care where we can address customer needs with highly engineered solutions that can be introduced into the market in a shorter timeframe via the health care customers.

We are doing a deep dive on three, high-value and high-growth segments where we've had initial traction through our channel partners and believe we could see some significant expansion with a proactive direct go-to-market strategy in place.

Those three areas are smart home devices, smart packaging and specialty retail.

The growth in RFID inlays for specialty retail applications alone is expected to be over 25% CAGR over the next five years.

We are spending time in these ecosystems, estimating the underlying TAM's, understanding the key unmet needs and mapping out how Identiv can support and effectively compete in these segments.

I am pleased to be working closely with our Board adviser, Manfred Rietzler, the founder of SmartTrack, to support the development of our strategy and associated roadmap to drive success in these areas.

Finally, our third strategic pillar is our longer-term transformational growth strategy for high-value applications within the healthcare, medical device and pharmaceutical industries.

For this important strategic growth area, we are working closely with our two Board directors who have deep roots in health care, Dr. Rick Kunes and Laura Angelini.

We have also engaged a health care-focused advisory firm, Fletcher state with whom I've worked in the past to help us evaluate the broad range of health care-related IoT applications and identify those with the strongest market dynamics, large potential tenants and where we have the greatest potential for a long-term competitive advantage.

With such a space analysis and market input, narrowed up with our technical assessment, we have narrowed our focus to four priority areas: first, authentication of high-value consumables for diagnostic test equipment and medical devices.

These medical devices is over $5 billion higher value consumables globally per year that require authentication for a genuiness, calibration or assembly verification.

We have several commercial programs today providing for authentication of ventilator, surgical and diagnostic consumables through our HF technology.

We see our customized HF inlays and encoding services as an excellent fit for this application and there appears to be a good opportunity to expand.

Second, NFC enabled smart labels for drug delivery in the home setting.

These labels can provide important safety and dosing information to the patient.

Improved overall medication adherence, reduced potential for counterfeiting and provide pharmaceutical companies with easier management of recalls, expiration dates and adverse events.

That includes auto-injectors as well as inhalers and prefilled syringes and potentially other drug delivery devices.

Globally, there are over $1.5 billion tangible units between injectable devices and inhalers The third area, cold chain condition monitoring and tracking for the pharmaceutical industry.

Given the high growth of biologics and pharma, the need for more real-time monitoring and tracking within the cold chain is rapidly increasing.

We believe the BLE devices we have partnered to develop support a solution that can provide additional functionality and information to address these needs.

The volume of taxable units in the global cold chain is between 4 billion and 8 billion units annually.

The fourth area, clinical samples that require real-time condition and location monitoring could also leverage our BLE devices similar to the pharmaceutical cold chain.

In the US alone, there are over 5 billion clinical lab tests done every year.

As we further explore and gain clarity on the high-value segments and opportunities for Identiv.

We intend to prioritize and develop our go-to-market plan.

Rest assured, we will carefully invest our capital in these new growth areas only when we have strong confidence in Identiv success and the potential for a compelling return on investment.

Opportunities for inorganic growth will also be considered if there are significant synergies in the combined entity offers a compelling return for our investors.

In closing, I want to reaffirm my excitement about leading the IoT team through this transformational period.

We have a lot of work to do to ensure the business has a strong foundation and we are focusing on the highest potential opportunities to grow the business.

I'm confident that with a clear vision, a comprehensive and disciplined plan for profitable growth and focused execution, we can capitalize on the tremendous opportunity before us.

I look forward to sharing more details on our next earnings call in November and meeting with investors in the coming months.

With that, I'll turn the call back to Steve.

Thanks, Kirsten.

I won't add any further comments since Kristen's comments and leadership stand on their own.

I'm personally very thankful to have found such an excellent leader to take our business forward and realize the tremendous opportunity we have.

Since this will be my last earnings call, I'd like to thank you all for your support and also thank our people, partners and customers.

I look forward to remaining as a substantial investor and supporter of the business as Kristen and her team takes it forward.

With that, I'd like to open the call for your questions.

Operator, please open the question queue.

Certainly at this time we will be conducting a question-and-answer session.

(Operator Instructions)

Jason Smith, Lake Street.

Yeah, thanks for taking my questions and thanks for all the color.

You noted phasing out 10% of this year's volume related to low margin business.

But just curious, once you've been looking at the current pipeline, are there any projects within that pipeline that you deem as low probability and don't meet the newly implemented criteria.

And yeah, I mean, we're assessing the new product development pipeline continuously, right?

And oftentimes as project and they look pretty promising.

But as they go through development, you learn more things either about the requirements or what's required or what the use cases that we do want to discontinue them.

So we're certainly taking a very good look at the current pipeline, and there certainly will be some that we decide to discontinue ultimately because they don't meet the criteria that we're setting up.

And that's normal.

I mean that in any kind of new product development pipeline, you will have a certain amount that fall out over the course of it.

We just want to make sure we're being very disciplined and that we as soon as we know, they're not going to meet the criteria that we do stop putting resources on them.

Okay.

That makes sense.

And then just as a follow-up clarification on that $60 billion to $70 billion EBITDA break even target, does that assume a gross margin in that 26% to 28% range, or does that assume that you can get above 30%?

It same getting rate, right, close to that 30%.

Okay, perfect.

Thanks a lot.

You're welcome.

Stacy Che, B. Riley.

Hi.

Thanks for taking the question.

I'm asking for (inaudible) regarding some of the questions.

So first on, I was wondering if Kristen or maybe, Steve, if you could break down some of your plans going forward for the OpEx on when we're looking at the Thailand facility based on your strategic move for the headcount, how do we think about it going forward on?

Do we expect that to go up maybe sequentially near the second half of the year, if you can break that down a little bit, thank you.

Yeah, So in terms of how the many but the overhead manufacturing expense, we're certainly in the mode of we're still ramping up in Thailand and we're training the staff.

We're giving the staff in place, and we're definitely still in the process of ramping up in Thailand.

And unfortunately, that has to be phased a little bit ahead of when we can ramp down in Singapore.

So we have still a couple of quarters where things are going to continue to grow.

And then we'll see as we are completing the transition at the end of this year and only supporting these three customers going into next year.

You'll start to see a steady reduction.

That's helpful.

Thank you.

And if I can just ask a follow-up on regarding the cash burn going forward, how do you think we play that into account of your short term midterm and long term plan over the next few quarters versus what we have for the current quarter.

And whether if we are mitigating on cash flow or needing more of that going forward to run the business?

Thank you.

I can take that one.

This adjustment we've put out the 14 to 16 guide the side and the data as our prior guide was higher than that.

So we've sharpened our pencils and taken a look at what our next 12 months are.

As far as the linearity over the next 12 months.

That's going to be pretty linear over the next four quarters.

So if you're looking for a quarterly guide, I think that 14 to 16 is going to be pretty spread pretty evenly over the next 12 months?

I think that to answer your question, was there a follow-up to that?

Yeah, if we can.

Thank you, Justin for answering that.

Maybe just last question, is that how do we think about when we want to I'll follow-up with building the both business?

And can you help us understand about the sequential growth with Identiv and premises, the seasonality going forward, do we expect that to go back to about the normal level?

Or how should we think about that going forward?

Yeah, I think going forward, if all goes as planned, the physical security business within this quarter, we'll be part of a separate company under (inaudible) protect.

So if you looked at our press release, we just put out everything we're reporting now is under our IoT go-forward business.

So I'm going to I'm not going to answer what the go-forward looks like from a physical security side, but for the identity side, IoT side?

Yes, I think that our go forward is you'll see because we put out what our Q. three revenue is going down slightly from Q2.

So a lot of the stick seasonality you saw in the past when you're talking about a combined business that Q3 spike was within our physical security side due to federal year end, and most of that is going away.

So when you're looking at it from a pure IoT perspective, a lot of that seasonality that you had historically seen for Identiv as a combined company will be going away.

So we did give the Q3 guide.

I would factor that one and I think that answers your question on seasonality because historically, our seasonality spike has been the two three quarters.

So that's related to our physicals therapy business.

Thank you.

We have reached the end of the question-and-answer session.

And I will now turn the call over to Steve Humphreys for closing remarks.

Okay.

Thanks, operator, and thank you all for joining us this evening.

And we'll certainly continue to update you all on the business progress and especially the KPI's as Houston's described.

And of course, on our progress and time line for closure of the transaction.

If you have any questions, please reach out to our Investor Relations at ir@identiv.com. So thank you all again for joining us and have a very good day.

This concludes today's conference, and you may disconnect your lines at this time.

Thank you for your participation.